When a company becomes large, the rules will change and when the company does what government policies would like to be done, the rules continue to change. One of the rules is when a company cannot pay its debts, the company has to sell assets and become a much smaller company. However if the company is doing the bidding of the government, then the govenment will ensure that it has all the possibilities of a turnaround as can be given.

In an article by Clare Jim and Xie Yu of Reuters, the biggest property developer in China is the Evergrande Group. The company has $300 billion in liabilities, but only $240 billion in assets and at the moment is the poster child of a debt crisis that engulfed China’s property sector.

For the past 30 years, the property sector has been one of the drivers of the economy of China accounting for 25% of the world’s second largest economy. The government through modernizing the country has paid for billions in infrastructure to transform the rural population to the urban centers to live and work as China was the world’s manufacturing hub. The economy is changing and higher prices for housing are not happening as property prices fall.

One of companies which holds bonds is Kirkland Ellis and one of the partners Neil McDonald said the company has been a very clear message by the court that this is the last change to propose a viable restructuring plan that is acceptable to the creditors. The court date is set for December 4.

Linking to dividend paying companies, by their nature and size, the companies often mimic the government of the day because they are doing what the government wants them to do. In the above example, the real estate company has been having debt problems for years, Evergrade defaulted on debts in 2021, but it has taken a long time to go through the system. With every company there are some assets, and some bond creditors will be paid closer to 90 cents on the dollar, with bonds they bought for cents on the dollar. However, the common shareholders will have limited value for the shares will be diluted or more shares issued for bondholders if they believe the underlying values will rise. Outside looking in, when a company controls more than 5% of the market, the government wants to the company to survive in one form or another.

There are more questions than answers, till the next time – to raising questions.